ByGiuseppe Fonte, ReutersPaolo Biondi, ReutersNovember 15, 2011

Rome — Mario Monti looked close to forming a new government on Tuesday as financial market pressure mounted to end a damaging political crisis that has brought Italy to the brink of disaster.

Political sources said the prime minister-designate could go to the presidential palace as early as Tuesday night to present a technocrat government that must implement tough reforms demanded by European leaders to restore shattered confidence in Italy.

Business leaders who met Mr. Monti on Tuesday afternoon said he had told them he was almost ready to present his cabinet.

Monti's chances were considerably boosted by backing from the PDL party of Silvio Berlusconi, who was forced to step down on Saturday by a crisis that has pushed Italy's borrowing costs to untenable levels.

Angelino Alfano, secretary of the center-right PDL, told reporters: "We think that the efforts of Professor Monti are destined to have a good outcome."

Backing from the PDL, Italy's biggest party, is significant because many of its members have until now opposed the predominantly technocrat government that Monti is scrambling to put together to face a burgeoning debt crisis that threatens the whole euro zone.

Monti's new government must have strong parliamentary backing to implement what are likely to be unpopular austerity reforms. Any failure or delay in his efforts would cause a devastating new assault from financial markets.

Underlining the pressure on Monti was renewed market turmoil, with yields on Italy's 10 year BTP bonds climbing to more than 6.9 percent, close to the 7 percent level at which Greece and Ireland were forced into bailouts. News that he was making progress had no immediate effect on the yield.

The Italian association of foreign banks added to the pressure, warning that failure by former European Commissioner Monti would be a disaster.

Monti had lunch with President Giorgio Napolitano on Tuesday after winding up talks with political parties to win backing for his government.

A senior political source said he could announce his ministerial line-up after meeting trade unions, employers, women and youth groups in the afternoon.

Monti began consultations on Monday after his nomination on Sunday by Mr. Napolitano, who has engineered an extremely rapid transition in response to the crisis.

BRIEF RESPITE

After a brief respite at the end of last week when it became clear Mr. Berlusconi would resign, Italy's borrowing costs have now returned to critical levels amid uncertainty over whether Monti would succeed.

Rescuing Italy, with its 1.9-trillion-euro public debt, would be too much for the euro zone's existing financial defenses.

Monti said his government should last until the next scheduled elections in 2013, despite widespread predictions that politicians intend to give him only enough time to implement reforms before precipitating early polls.

Monti has said he would like to include politicians in his cabinet but the big parties are insisting it should be made up purely of technocrats – a sign of their wariness about a process forced by financial pressure.

Political sources said mutual suspicions and disagreements among the parties was complicating the attempt to include political figures.

Lack of political cover for unpopular reforms could be dangerous for Monti.

Pier Luigi Bersani, leader of the second biggest parliamentary group, the Democratic Party, said he had an "encouraging" meeting with Monti. It covered the financial crisis as well as constitutional reform and Italy's widely criticized election laws, and the party had not set any time limit on the government.

"We confirmed we want to support a technical government of high quality, not to offer it less support but to support it better," he said.

European Council President Hermann Van Rompuy said the eurozone was watching events in Italy "very closely."

Monti, 68, faces formidable political headwinds.

Berlusconi, forced out to the mocking jeers of thousands of protesters on Saturday, is reported to have told reporters the PDL "can pull the plug whenever we want."

Newspaper speculation about the identity of the new ministers continued with Guido Tabellini, rector of Bocconi University in Milan, seen among the favorites to take on the crucial economy portfolio.

The president has called for an extraordinary national effort to win back the confidence of markets, noting that Italy has to refinance some 200 billion euros ($273 billion) of bonds by the end of April.

A convinced free marketeer with a record of successfully taking on powerful corporate interests during his decade in Brussels, Monti has spoken frequently of his support for controlling public finances.

He also supports policies such as boosting competition, opening up closed professions and lowering the tax burden on employment.